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What is Forex?

What is the Forex?

The FX market is a global decentralized over-the-counter financial market for the dealing of currencies. Financial hubs around the world including London, New York and Tokyo serve as mainstays of trading between an extensive array of different types of buyers and sellers both day-and-night, with the exclusion of weekends.

The foreign exchange market shapes the relational values of all different currencies. The basic aim of the foreign exchange is to help international trade and investment, by permitting businesses to exchange one currency to another. By way of example – when a large Japanese car manufacturer needs to transfer Yen to sterling to pay their UK staff they have essentially participated in the Forex market. This transaction could happen at the bottom of a trading range where speculators also buy into a perceived “value” area and the price could suddenly move up on “event risk” after financial data is released – Forex news traders may attempt to profit from this – a central bank could then transact a Yen order to devalue the currency. There are countless variables involved.

Forex Volume

The foreign exchange market, which is generally called “Forex” or “FX” is the biggest financial market in the world. Compare this to the paltry average daily trading value of the NYSE which was approximately US$153 billion a day when measured in 2008. The FX market weighs in at $4 trillion a day trade volume! Retail traders account for around a quarter of this volume. Trading in London accounts for around 35% of the total Forex volume and therefore London is far-off the most significant global centre for FX trading. New York and Tokyo are in second and third places respectively.

History of the Forex market

The modern-day forex market started taking form during the 1970s when nations gradually changed to floating exchanges from the former exchange rate regime, which remained fixed as per the Bretton Woods system. On 15/8/1971, the United States terminated convertibility of the dollar to gold. Since foreign exchange is an OTC market in which the Forex brokers transact directly with each other, there isn’t a central exchange or clearing house. The Forex is split up into access levels. At the highest level is the inter-bank market, which is assembled of the largest commercial banks and securities traders and accounts for over 50% of all dealings. At the lowest level are retail trades. The upper echelon/access level enjoys smaller difference between the bid and ask price which is called a better “spread”.

About 80% of the worlds FX exchange dealings are speculative. When we trade as price action forex traders we are looking to take money from other market participants as this is a “zero sum game”. In other words when we make money – someone else is losing – and vice versa.